Traders are anxiously awaiting the Nonfarm Employment Change number tomorrow. While this number causes the biggest stir in the currency and other financial markets, the Bureau of Labor Statistics issues many other numbers at the same time. One of these is the Unemployment Rate.
Over the past year, the Unemployment Rate has hovered between 4.4% and 4.8%. Last month's reading came in at 4.5% and the forecast for tomorrow is 4.6%.
Traders and economists generally view the Unemployment Rate as a lagging indicator. As such, they don't believe it has much predictive value. However, this indicator can be predictive at certain times--and right now may be a critical time to monitor it.
Why is this? Well, labor is the biggest expense for many companies. When these companies believe a downturn is coming, they often cut labor costs (i.e., decrease jobs) well before a recession arrives. When this happens in the aggregrate, the unemployment rate increases. While Greenspan and others have been using the "R" word (recession) recently, there's been no evidence of it from the unemployment rate. The rate is down slightly from last summer and March's reading is below the 12-month average.
Of course, recessions involve more than employment, so this one indicator isn't a stand-alone prediction tool. However, it is one piece of objective evidence that doesn't point to a recession. And objective data is usually more reliable than an analyst or politician's mere opinion.
Source Fx logic
